Tied up in court: City's former insurance administrator still costs taxpayers

Key audit outside of public view

An FBI agent looks over documents May 14, 2008, at Lubbock City Hall during a raid that seized records and documents relating to its investigation into conspiracy, false statements, wire fraud and health care fraud.

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A $4 million settlement in April between the city of Lubbock and its former insurance administrator ended years of charges and counter-charges over improper fees and commissions, costing taxpayers millions of dollars.

Figures provided by the city for the years 2004-06, show the city paid more than $45 million in health claims and $1.3 million to operate its city clinic.

Taxes had to be raised by the City Council in 2006 to cover health insurance costs. Taxpayers continue to pay.

In the end, after reaching a settlement, both parties said they had reached satisfactory closure. City officials declared the settlement a fair one. Representatives from HealthSmart Holding Inc. said its differences with the City Council were resolved.

But what happened in those six years of legal battles? How much did the reams of legal documents and court hearings actually cost taxpayers?

And how much did the two-year administration of health insurance for 6,000 city employees cost taxpayers?

The answer to the first question is in the settlement, which is unlikely to become public soon. Texas law specifies that settlements of governmental bodies are presumed public information and subject to release, unless a judge holds a specific hearing. The HealthSmart settlement did not disclose the audit because a specific lawsuit on the exact issue was already pending, said Don Richards, attorney for the Avalanche-Journal.

The answer to the second rests in an audit, which HealthSmart wants kept out of public view because, its attorneys say, the document contains proprietary information that would damage the insurance company’s ability to be competitive.

Likely, that audit will not be made public soon, despite the efforts of the city and the A-J, until the Austin-based Third Court of Appeals orders the document’s release.

During negotiations, the city asked HealthSmart to release the audit with the settlement. Representatives for the insurance administrator refused.

Councilman Victor Hernandez, the lone dissenter in the 5-1 settlement vote, wanted the audit made public.

Eight months later, Hernandez feels the same. Advocating having the audit made public is an issue of transparency, something that is a focus of the City Council, he said.

“It has kind of died down; it’s kind of been pushed to the back burner,” he said. “I’m glad to see it brought up again.”

Two others sitting on the council at the time, and who voted for the settlement, decline to discuss the audit.

Councilman Todd Klein said the settlement has proven to be a good one.

“Ideally, the public has a right to know, and it would be my preference, in terms of transparency, to have it released to the public,” he said.

Councilman Floyd Price likes the settlement. “The city really came out good on that,” he said. “We didn’t lose a whole lot.”

Initially, the Avalanche-Journal requested the audit from the city under the Texas Public Information Act. The city would have released the audit upon the newspaper’s request, but HealthSmart objected, requiring the city to submit the request to the office of Texas Attorney General Greg Abbott for an opinion. The Attorney General’s Office agreed the document should be released.

After the attorney general’s ruling, HealthSmart immediately challenged it in Travis County District Court, and Judge John Dietz then ruled the audit is public information and should be released to the public, affirming the attorney general’s opinion and supporting the position of the city of Lubbock and the A-J.

HealthSmart then filed an expedited appeal to the Court of Appeals, where the case is pending.

Legal representatives for HealthSmart have declined to talk about the appeal, saying they do not discuss pending litigation.

The newspaper continues to advocate making the audit public, spending thousands of dollars to do so and saying so on its editorial pages. “We do not hesitate to protest to our public officials when we believe they have not acted in an open manner. We believe most of our public officials also want open government, but when we feel they don’t, we’re willing to take legal action, if necessary to support that belief,” states an editorial from Jan. 1.

Richards says this issue in the lawsuit “goes to the very basics of open government and accountability of a governmental body to its public.”

“Texas law expressly specifies an ‘audit’ is ‘core public information’ which must be ‘promptly’ disclosed upon request. HealthSmart’s extensive legal challenge to an express provision of the public information law has delayed release of this important aspect of information that the Legislature has expressly detailed should be ‘core public information’. Both the city and the A-J, in their legal involvement on this issue, understand the important public policy behind the transparency of a public institution to its taxpayers,” he said.

“An audit, by its very nature, is a crucial element of accountability. In this case, we are not just talking about a financial audit (even though the dollars are substantial), but this involves a much broader audit of the basic management and operational aspects of a major program of city government. It involves public funds, public employees and public officials. The public has the right to know what happened, and the dollars involved,” Richards said.

How we got here

In 2003, the city contracted with ICON Benefit Administrators II, LP, part of the Parker Group, owned by Lubbock businessman Ted Parker, to administer a health plan for the city in the 2004 calendar year. In December 2004, the city extended that contract for two more calendar years, effective through December 2006.

In 2005, The Parker Group announced the formation of a third-party administrative division, American Administrative Group (AAG), an affiliate of HealthSmart under the Parker umbrella, under which ICON and a couple of other administrators, also under the Parker name, would fall.

In May 2005, then-Assistant City Manager Lee Ann Dumbauld asked for an audit of ICON’s files. ICON refused and no audit was conducted.

Dumbauld declined to talk about the case because it is still in court. “Because of the pending litigation, we have a non-disparagement agreement,” she said.

Then, in December of the same year, Medco Health Solutions, the provider for the city’s prescription drug benefits program, notified the city by letter that ICON was receiving commissions, marketing fees and rebates in violation of the city’s contract with the health plan administrator.

In September 2006, the city received letters from three city insurers — Highmark Life Insurance Co., Pan American Life Insurance Co. and AIG Life Insurance Co. — stating that AAG was receiving commissions on premiums from stop loss and transplant policies in violation of its contract.

A stop loss policy takes effect after a certain amount has been paid in claims. Organizations, such as the city of Lubbock, that are self-insured have stop loss policies to protect themselves against very large claims. A transplant policy allows organizations that are self-insured to pay a flat monthly cost. It is separate from the stop loss policy.

In October, the city sent a letter to Parker at AAG, demanding a refund on the rebates totaling $212,852. The letter notified AAG an audit was coming.

Shortly after, the city hired Benefit Plan Audit Services LLC, an independent firm based in Brentwood, Calif., to conduct an audit of the administrator.

In December 2006, Robert Frcek of Benefit Plan Audit Services wrote to AAG, notifying them of tasks they would need to complete before auditors could begin an on-site visit on Jan. 15, 2007.

In the meantime, the city had switched its health insurance provider in October 2006 to Blue Cross Blue Shield from the HealthSmart affiliate.

In an affidavit filed with the court in 2007, Frcek said he received no cooperation from AAG. Instead, the administrator provided Frcek with data files in formats the auditor couldn’t use and with incomplete data.

Frcek visited the corporate offices on West Loop 289 in Lubbock on a scheduled date in February 2007 to start the audit. There, according to his statement, Frcek was told AAG executives couldn’t meet with him. Later that day, he was told the audit could begin nearly three weeks later.

Correspondence between Dumbauld and executives for AAG shows the company continued to cooperate in some instances and later refused to provide access to records.

Finally, the city went to court and asked a judge to force AAG and ICON to produce records for the audit.

AAG responded that the city wasn’t entitled to the information it sought through the audit; the city violated its contract by switching to Blue Cross and the city set unreasonable deadlines in its audit requests.

What the first audit says

In documents filed with the courts and marked April 7, 2007, both sides filed their opinions.

Benefit Plan Audit Services wrote its opinion of AAG’s claims and controls. Its conclusion of the operations of AAG: “Unsatisfactory.”

Frcek, who also wrote the audit report, found four reportable improvement issues. He also found AAG had overpaid $73,375 in claims and underpaid $7,675 in claims, for an accuracy rate of 94 percent.

The auditors reviewed a random sample of 195 claims paid between Jan. 1, 2004, and Oct. 31, 2006. The audit concluded that 97 percent of those sample claims were paid correctly, which in the view of Benefit Plan Audit Services was unsatisfactory.

“Based on these findings, the extrapolated amount overpaid within the population file is $1,765,698.59 and the extrapolated amount underpaid within the population file is $139,492.23, representing total erroneous payments of $1,905,190.81,” the report reads.

Auditors also pointed out that AAG processed 98 of the 195 sample claims within 10 business days. The industry standard is 90 percent of all claims within 10 business days, according to the report.

Auditors found that from Jan. 1, 2004 until Oct. 31, 2006, AAG collected at least $195,591 in market and administrative fees on various stop loss and transplant insurance policies, fees not specifically listed in the schedule of fees within AAG’s contract with the city.

Additionally, the audit noted that Medco paid AAG fees totaling $40,704 for the first nine months of 2005, leaving the auditor to estimate that total fees paid to AAG for the rest of the year would have been about $120,000. Again, the auditor points out these fees were not enumerated specifically in the contract with the city.

HealthSmart’s response

To evaluate the methodology used by Benefit Plan Audit Services, AAG hired Northshore International Insurance Services Inc., based in Danvers, Mass. In a rebuttal to the city’s audit, the insurance administrator’s auditor took issue with the method of extrapolation used by Benefit Plan Audit Services.

“If a total of $81,049.51 in errors occurred in 195 claims, then an average error of $15 occurred in each of the 126,867 claims in the total audit population, producing and extrapolated error total of $1,903,307.84, across the entire population,” the rebuttal reads. “Such a methodology to calculate payment accuracy is not standard in our industry; rather, the standard calculation utilizes the product of errors against the total sample population.”

But even using Northshore’s method, the extrapolation would produce an accuracy of 97 percent, which is less than the industry expectation of 99 percent or better, according to the rebuttal.

AAG posited it overpaid claims amounting to $45,493 and underpaid $5,675 in claims, for a 98 percent accuracy rate.

As far as the commissions and fees were concerned, AAG claimed in the rebuttal, the marketing of transplant coverage and stop loss insurance is a separate function from claims administration, and the charges are common.

The (city of Lubbock) did not utilize a broker or consultant, who generally receive 15 percent in commissions, to market stop loss and transplant coverage,” AAG’s rebuttal states. “The function was performed by AAG who received 10 percent in commissions at a savings to the (city of Lubbock). Further, the (city of Lubbock) accepted the stop loss bid without requiring information on market fees.”

Medco’s transactions were not part of the scope of the audit by Benefit Plan Audit Services, according to the rebuttal.

“We also note that rebates were paid by Medco directly to the (city of Lubbock), without any handling by AAG,” the rebuttal reads

Where to from here

The legal battle continued.

State District Judge Ruben Reyes issued a gag order, preventing either side from talking about the case publicly.

After the audit came out in 2008, AAG asked Reyes to appoint another auditor to review the original audit’s findings.

Instead, Reyes ordered the city and AAG to arbitration.

Shortly after Reyes’ order, on May 14, 2008, the FBI searched Lubbock City Hall and the city’s Information Technology Department, seizing records and documents relating to its investigation into conspiracy, false statements, wire fraud and health care fraud, according to a search warrant filed in U.S. District Court in Lubbock.

Targets of the investigation were then-Councilman John W. Leonard, Parker and Gary Boren, a former City Council member and vice president of G. Boren Services. Leonard and Boren were council members who supported the Parker agency handling the city’s insurance as late as 2006.

It would be three-and-a-half years before the U.S. Attorney’s Office would release a statement saying its investigation was over. None of the men were indicted or accused of wrongdoing.

None of the parties involved in the investigation have commented on the events other than statements from Leonard and Boren earlier this year when the federal prosecutor announced the investigation’s end.

Leonard issued a statement: "I am relieved that this four-year-personal nightmare is over. I have maintained my innocence throughout this painful process. It is unfortunate that the personal politics of destruction, initiated by a key elected city official and a few city bureaucrats against a handful of their perceived opponents, were so extreme and costly to the taxpayers of Lubbock."

At the same time, Boren said, "I'm not surprised that the FBI and the U.S. attorney came to this conclusion because I do not believe I did anything wrong."

Meanwhile, arbitration continued.

A second, independent audit was agreed upon. That audit was conducted, and the results were made known to city officials and HealthSmart.

After the federal prosecutor closed the books on the case, city officials quickly convened in a closed-door session, called that same day — a Friday — for Monday. With the specter of federal prosecution lifted, the City Council could pursue a settlement and just before a citywide election set for May.

That closed-door session didn’t result in a settlement.

But a month later and just days before voters were to go to the polls, the City Council reached its settlement with HealthSmart, which agreed to pay $4 million. City officials have not said exactly how much money was in dispute or the total of the legal fees.

As the parties wait on the appeals court decision, three city councilmen talk about the lessons learned from the experience.

Price is at a loss for what the council could have done differently in the case of HealthSmart. At the time, he said, he didn’t know all the background information — the legalities, what the insurance carrier was doing or what the insurance administrator was doing.

“When you’ve got that type situation, you don’t know what you could do to stop all that,” he said.

Hernandez said he wants closer supervision on contracts and a person designated specifically to carry out that task.

Klein doesn’t expect the city to run into this kind of legal haggling again over contracts because the council has instituted rules that all contracts must be complete to form before the body signs off on them.

The issue with HealthSmart was, at least for Klein, not so much a system of checks and balances, but a matter of the contract’s language.

“Clarity of the specifics of the contract was the issue and not a lack of supervision,” he said.

Price acknowledges city officials have learned a lesson: to examine contracts closely and keep an eye on them.

“We won’t get into that again,” he said. “We are looking at more legalities on a contract. … Now, you look for everything that is a possibility.”

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Hey Greenberg, who gives a damn? The Federal Bureau of Investigations - who have everything at their disposal - dropped the investigation due to no wrong doing. Looks like a civil matter that was settled is all that has happened here. The only crime is you wasting ink and paper on this old-as_ stinking story. Go chase Mayor Robertson around and report on him if you have nothing better to do. Idiot.

I wish the A-J would devote as much time on other more recents 'IRREGULARITIES' with the way the city of Lubbock, LP&L, WTMPA,LEDA and the county do business. I can recall many other scandals lately. All were swept under the rug and ignored by the A-J. One city facility was even named for a guy involved with misappropriating funds,etc at WTMPA/LP&L. LP&L and LEDA spend millions of taxpayer dollars and they are UNSUBSTANTIATED.Why no drawn out investigation into those debacles? This attempt to dredge up old so-called news can be construed as a sustained effort by the A-J and the city of Lubbock to taint a former business that has for all sakes and purposes been vindicated many times over by several different courts, judges, etc.

Furthermore, Victor it's like pot calling the kettle black when you are quoted in this article. You can't even keep your mortgage payments in order or your taxes and there is this dirty little matter of some 'missing records' when you had some sort of leadership position with the Fiestas del Llano committee. Aren't those city funds in the form of cultural/ promotional grants? What a mess. The point A-J, is that no one knows for sure. Why don't you focus on Victor Hernandez' dealings so that we can get to the bottom of that issue? Let's dredge those up just for fun, heh? Let's see if Hernandez and the lynch mob can withstand the scrutiny of the FBI. Parker was forced to leave Lubbock because of the way that he and his family and business were defamed, slandered, etc. Why does Victor get an out? Is it because he is a part of the lynch mob along with the city manager and other former council persons? And how 'bout the way that Victor as a councilman is allowed to make claims on windows and other materials that the city/contractors make available when they tear down a business property, etc? That just does not pass the smell test if you ask me.

it's the actions of the city council at the time.
We had one very vocal council person who tried to play the role of community activist who never missed an opportunity to get his pic and name in the AJ and on TV...he resigned without explanation the day this stuff hit the fan. Seems like there was another involved who disappeared as well.
THESE are the people whose roles I want to know about.